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The End of Director’s Law?

August 10, 2010

Many have long believed that big government helps the poor at the expense of the wealthy. But back in the glory days of economics at the University of Chicago Aaron Director noticed a recurring theme in the way democracies cut the pie. Given the power to tax and redistribute, you might expect those on the bottom (plus one to gain a majority) would form a coalition to snatch away the wealth of the top 49 percent. But this doesn’t happen. Director teased out why: forming a winning coalition requires intelligence, effort, organization, endurance, resources, indignation…capabilities the poor simply do not have. This is part of the reason why they’re poor, after all. For the very same reasons they struggle in a free market, they fail in the political market too. By Director’s logic and contrary to popular belief, the big jackpot winners in democracy are the members of the motivated middle class. They take from the rich and the poor. (Here’s George Stigler’s paper on Director’s Law.)

Today Eric Falkenstein says the middle class is no longer the dominant coalition in the U.S.. Instead, we have a bar bell coalition made up of the political savvy and the lowest classes. He says it’s the end of Director’s Law:

So, perhaps every society has a different optimal coalition at various times, and currently I don’t see what will keep it from bringing everything down to the coalition of a few elites, sincerely deluded as to their belief in the virtue of government spending, combined with a vast entitlement mob at the bottom, all literally feeding off the middle class. It sounds a lot like South America.

I’m not certain Eric’s got it right here, though. I wouldn’t repeal Director’s Law yet. There’s a publicly funded middle class that is still grabbing, grasping, gripping, plucking, possessing and raiding quite well. Just like old times. The inexcusable public pensions, the outlandish salaries for cops, tenured public school teachers, and city managers, the coming baby boom entitlement tsunami, increasingly generous student loan programs for increasingly useless undergraduate degrees, bailouts for unions, banks and insiders—all of this is tribute paid by the rich and the for-profit middle to the politically connected. The demographics have changed some, but not completely.

Anyway, Milton Friedman explains Director’s Law here:


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